Dividends vs. Retained Earnings
Read the following content and answer all the questions in the following. Make sure you answer all the questions in the following.
As of June 2004, Microsoft’s quarterly dividend was four measly cents per share. With $50 billion of cash on hand, on July 20th of that year, the company announced a one-time “special dividend” of $32 billion, or $3 per share. Should the Microsoft investors have been happy that they were to be receiving gobs of cash in the form of this special dividend?
Seems like a funny question. Is winning the lottery a good thing? Am I better off getting a bonus, or not?
Unlike these windfalls, shareholders receiving dividends are simply getting what is already theirs. Before receiving the dividend check, they already owned that cash, because they own everything of the company’s.
“Wait!” you say. “Didn’t we discuss that receiving a dollar today is more valuable than receiving it in the future?” Indeed, it is, but.. that’s if you are comparing having a dollar today, which you could invest and earn some rate of return on, versus receiving just one dollar in the future. That’s not what we’re talking about in the dividend decision.
If you. the shareholder, get the dividend now, you’ll invest it in something or other, and earn some investment return. Conversely, if you do not get the dividend now, this company will retain the funds and invest them in the company’s activities, and (presumably) earn some investment return.
How do you now feel about the Microsoft dividend?